Payday loans are an increasingly popular alternative to conventional lending options, and it’s easy to see why.
They can save you from last-minute financial issues and keep your finances afloat until your next paycheck comes in.
However, payday loans don’t come without their own set of risks and disadvantages, so be sure you know what you’re getting yourself into before signing the dotted line on one of these bad boys.
Here are the most important things you need to know about payday loans, along with some helpful tips on how to make the most of them while also staying safe and avoiding disaster.
How Payday Loans Work
Payday loans are small, short-term loans that borrowers use to cover their expenses until the next paycheck.
Typically, you’ll have about two weeks before your next payday to pay back the loan. That’s not a lot of time, so it’s important to understand what you’re getting into with a payday loan before you take out one.
The most common type of payday loan is called an Installment Loan. Unlike other types of loans where you borrow a lump sum and then make monthly payments.
Installment loans give you a certain amount of money upfront and ask for fixed installments at regular intervals, usually weekly or biweekly.
You may be asked to provide some form of collateral such as property deeds or stocks. If you don’t pay on time, the lender will typically sell your collateral to recover their losses.
The interest rates vary from company to company but can range from 15% – 30%. It’s wise to compare rates before taking out a payday loan.
The Costs of Payday Loans
A payday loan is a short-term, high-interest loan that you can take out in an emergency. The interest rate is typically around 400% APR, which means you will pay back the loan with 400% more than what was originally borrowed.
If you’re struggling financially and need money for any reason, there are better options for getting it.
If a payday lender offers you a lower interest rate, beware; this could be a sign of predatory lending practices.
Rather than borrowing from a payday lender, consider taking on extra work or trying to find ways to save up your own money.
A much cheaper alternative to borrowing from a payday lender is using something called an overdraft protection plan from your bank.
With these plans, when you spend more money than you have in your account, your bank covers the difference by transferring funds from another account like your savings or line of credit (assuming there’s enough money in those accounts).
For example, if your paycheck doesn’t go through on Friday because your employer accidentally forgot to put it through.
But you had $500 in your checking account before payday and then spent $600 during the week, then the bank would cover $500 of that by transferring money from one of your other accounts.
Another option is to get a personal loan with a fixed interest rate instead of borrowing from a payday lender.
The Risks of Payday Loans
Payday loans have become a popular way for people with limited funds to cover their expenses until they receive their next paycheck.
They’re basically loans that are meant to be paid off when the next payday rolls around.
But, while they can be an affordable option, there are some risks associated with them. Let’s take a look at what you should know before getting one of these loans.
First and foremost, make sure that this is really your best option and not just because you don’t want to do any more research.
Remember too that these loans come with high interest rates so if it turns out your bank will give you the same deal or better on your credit card, then it might not make sense to borrow from another source.
Finally, make sure you read all of the fine print before signing anything! There are tons of hidden fees that can creep up and surprise you.
That may seem trivial now, but when you realize how much money those little charges will add up to over the course of the loan, it’ll probably change your perspective.
And finally, try not to take out a loan unless you absolutely need it – even though these loans seem like quick fixes, they often end up becoming long-term problems which we’ll talk about in Part II!
Alternatives to Payday Loans
Instead of using payday loans, you can use a credit card. This will allow you to pay off the balance over time rather than just having one large sum due every two weeks.
There are also other options such as getting a bank loan or taking out a personal loan.
As long as you have good credit, these alternatives may be easier to come by and more affordable.
The bottom line is that if you find yourself in need of some fast cash, there are many ways for you to go about it without needing to resort to paying high interest rates for a short-term solution.
In most cases, the best course of action is going to involve borrowing from friends or family members who would be willing to lend you money for free.
If not, then your next step should involve looking into either a bank loan or personal loan.
These are less expensive than payday loans and offer terms that range anywhere from six months up to five years.
One downside of these types of loans, though, is that they generally require collateral.
So if you don’t have any assets or real estate holdings, it may not make sense for you to pursue this option.
Tips for Avoiding Payday Loan Scams
Payday loan scams are becoming more and more common, especially with the rise of online lenders. If you want to stay clear of these scams, there are a few things you should know about them.
First, never give out your bank account number or any other personal information when applying for a loan.
Some scammers will use this information to access your funds once the money is deposited into their account and use it for fraudulent purposes.
In addition, be wary of ads that promise quick loans without asking for any sort of collateral; they might be too good to be true.
Finally, don’t sign up for multiple loans from different companies at the same time.
Instead, choose one company and get all your payday loans from them at once.
Then pay off those loans as quickly as possible so you don’t get caught in the cycle of high-interest rates and fees.